Current Research Programs

This paper examines the use of governance and incentive mechanisms beyond loan contract provisions that lenders use to reduce contracting costs with borrowers. We show that as the strength of the relationship between a borrower and lender intensifies (i.e., a relationship lending arrangement), borrowing firms are more likely to elect bank employees to their boards of directors, apply corporate governance structures that insulate managers from turnover, and increase information asymmetries with non-bank capital providers. We also find that for borrowers with strong bank relationships and entrenched managers, managerial contracts increase the manager’s incentives to take on risk (i.e. higher vega). Interestingly, many of the adopted governance and incentive mechanisms are commonly thought to decrease shareholder wealth in other circumstances. Our results highlight the importance of context in assessing the costs and benefits of governance and incentive structures.

Diffusion of Corporate Governance from Influential Adopters

Based on diffusion theory, I conjecture that governance mechanisms, in particular performance-contingent equity (PCE), exhibit behavior characteristic of influential adopter diffusion. That is, firms tend to emulate an influential industry peer in adopting PCE in their executive compensation contracts. Using a large sample constructed from textual analysis of proxy statements, I find evidence of influential adopter diffusion through robust positive relations between PCE adoption by firms and by influential industry adopters. The results apply when examining the design of PCE provisions as well. Additional analyses show that the diffusion relation between influential adopters and their peers varies inversely with industry heterogeneity and differences in CEO compensation structure, and is not driven by window-dressing incentives to placate activist investors. In sum, my findings shed light on the spread of PCE over time by way of influential adopter diffusion.

Internal Versus External Earnings per Share Goals and CEO Incentives

We examine the relative difficulty of analysts’ external earnings per share (EPS) forecasts and CEOs’ internal cash incentive plan EPS goals to assess the importance of achieving different goals for the same performance measure. The relative difficulty of external and internal EPS goals is associated with CEO compensation levels, earnings uncertainty, past performance, and changes in CEO equity grant magnitudes. Nearly all firms meet the minimum EPS threshold for their CEO to earn some bonus. A significantly larger percentage meet analysts’ EPS forecasts than meet their incentive plan EPS target. Firms are far more likely to just meet analysts’ EPS forecasts than to just meet their internal EPS goals, and are unlikely to achieve any internal EPS goal that is more difficult than analysts’ EPS forecasts. Our results suggest that CEOs have stronger incentives to achieve their external capital market EPS goals than their internal incentive plan EPS goals.